Wake Up, Bulls! The SPY ETF Is Setting Up a Trade

It has been a trying year for equity bulls, particularly for those looking to S&P 500 — via the SPDR S&P 500 ETF (SPY[1]) — for leadership.

[2]That is, until yesterday, when the S&P 500 and the SPY ETF smashed through a multimonth layer of resistance with a vengeance.

For those of us keeping a closer eye on price action in stocks, yesterday’s move was a long time in the making. The breakout also was aided from a healthy dose of short covering by investors that last week decided to short into the lows. But as I told one of my clients last week, shorting/selling a low when an established pattern of higher lows is still intact … well, it’s not a high-probability strategy.

It was easy for investors to slip into their bear suits considering the media’s constant focus on the Ukraine situation, the marginally slowing rate of economic growth, and its general fear-spreading mood. But at least for me, staying bullish in 2014 hasn’t been about stubbornly playing the contrarian lone wolf, and more just about letting the market tell me what to do.

Monday’s closing bell brought us fresh all-time highs in the Dow Jones Industrial Average and S&P 500 on nice momentum. The small-cap Russell 2000, after underperforming for the past two months, also got some love Monday, rallying 2.4%. All sectors (save utilities) closed the day well higher, especially financials, tech and transportation stocks, which hints at more upside in the S&P 500 and the SPY ETF in the coming weeks.

SPY ETF Charts

Looking at the multiyear chart of the SPDR S&P 500 ETF, we note that the index’s late 2012 uptrend remains intact, and that with yesterday’s break to new highs, the SPY ETF has confirmed the past few months’ sideways pattern as a consolidation phase rather than an immediate topping pattern.

To be clear, I do think we are running in the late innings of this cyclical bull market, but I also think one more push higher is likely. That push looks to have begun Monday.

With Monday’s breakout past the pattern’s neckline (black resistance line), this formation has taken an important step — one that likely opens up the SPY ETF for a move into the $192-$197 area over the coming weeks/months.

If yesterday’s gains are quickly reversed in the coming days (i.e., if the SPY again closes below the $188 area), then the SPY likely needs more consolidation time.

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Download Serge’s trading plan in the Essence of Swing Trading e-book here[4]. As of this writing, he did not hold a position in any of the aforementioned securities.